Why economies don't grow faster?
During a recent research project I was shocked when I discovered that economic growth in the last 100 years has shown a surprisingly consistent behavior: an almost constant rate of long run growth of GDP of 2,5-3% per year. This is traditionally known as the “technology frontier”, implying that for a developed economy to continue growing it must innovate, but that this innovation is only translated into economic growth via increased productivity, at the mentioned rate of 3% per year.
In contrast with this view of the growth rate of developed economies, we have the speed of technological innovation that can be seen across multiple industries like semiconductors, biotechnology, nanotechnology, genomics, IT, etc. In these and multiple other areas, the innovation rate is much faster than a 3% per year. In fact, in many cases we can see exponential growth rates with constant or even accelerating growth factors that multiply, not merely add, to the previous year situation. For example we can see how the Moore Law predicts double capacity of integrated circuits every 18 months (and this law has been happening for the last 20 years).
So why does it happen that the very fast technological innovation that we see across multiple industries is only translated into economic growth at a 3% per year?
In the end, technological innovation is at the center of economic growth. However, there seem to be significant differences between the speed at which different firms, sectors and countries adopt the same technologies.
For example, looking at the impact of IT in US and Europe, we see that during the period 1995-2001, in the US, productivity growth accelerated by 3.5 percentage points per annum in the ICT-using sectors (from 1.2 per cent p.a. pre-1995 to 4.7 per cent p.a. post 1995). This did not happen in Europe, which remained at a constant 2% growth rate in the same period. Since IT is available throughout the world at broadly similar prices– why were European firms not able to reap the same benefits from IT as their US counterparts?
The answer has to do with the market structures, institutions, protections and incentives to adoption that different firms have in different markets. If IT brings an increase in productivity and I'm in a competitive market, I'll adopt IT to remain competitive. If I'm in a protected market, why should I?
As many specialists have well described, it's not innovation per se what matters for economic development; it's innovation adoption within a country that will bring the growth for that country. This should be known for those countries that try to establish themselves as innovative. In some cases they would be much better off by simply improving conditions for adoption of existing innovations in their markets rather thah trying to establish themselves as the champions in innovation.
Labels: Economic Development, innovation, Management
posted by Javier Cabrerizo @ 10:53 PM
